There is a cartelisation by dominant player in Country's economy
By Nilanjan Banik
In the US there is a concept of measuring the consumer feel-good factor through inflation expectation. If the consumer feels that the inflation is likely to ease, they feel good about it and do not mind paying higher prices in the short run. In fact, the consumer settles for a higher price, and the business settles for a higher nominal wage. The forward-looking business managers do not mind paying higher wages to the workers, as they realize higher profits. This process of wage-price spiral continues for a while and eventually settles down to an inflation level within the comfort zone of the central bank.
For instance, for the US, inflation eased to a 4.1% level scaling down from the high of 9.1% in June 2022, and the expectation is it will climb down to 2%, which is what the Fed is targeting. The extent and the speed of wage-price adjustment depends upon how flexible or sticky the wage and prices are in the near term. For instance, during the COVID time, wages did not increase for a period more than a year. Also, the price may not change because of the ‘menu' cost.
Across the world, for the most part of 2022, inflation remained at an elevated level. Post-COVID pent-up demand times and the war between Russia and Ukraine have resulted in higher prices of daily necessities and luxury items. When inflation expectation is built into the system as may happen with exogenous shocks such as pandemics or with a war – outside control of policymakers – then it is quite natural for the businesses to increase the price and the consumers are willing to pay for it. Profitability of all luxury consumer products such as Louis Vuitton, Ralph Lauren, Estee Lauder, and luxury car makers such as Porsche and Aston Martin have all gone up post-2021.
Elsewhere, observing the higher prices for travel, hotels, entertainment, and leisure during recent times, one can argue that most of this is because of pent-up demand during post-COVID times. With the world supply chain network returning to normalcy, the consumer expects the rate of price increase will fall once the pent-up demand eases. Of course, in this short-run narrative, consumers are not factoring the impact of climate change which in the long run will have an impact, in particular on food and consumer staples.
Besides, climate change as a factor, there may be another that may make it difficult for the policymakers to control inflation. And this usually happens in the presence of weaker institutions such as competition commission.
Take for example India, which is now among the fastest-growing large economies in the world. When any economy is growing it leads to the formalization of economic activities. From an economic perspective, formalization is a healthy sign as it leads to more tax realization. The size of the national output and scale of operation grow with formalization, and this may in turn attract foreign direct investment.
The success story of the Chinese manufacturing sector has to do with economies of scale in production and a large domestic market. When the government realizes more tax revenue from formalization of economic activities, it can plow back part of the revenue collected towards incentivizing and making domestic production more competitive.
In India, the production-linked incentive scheme is a case in point, which is introduced to increase manufacturing capability and competitiveness of domestic manufacturing industries.
These are the advantages of having a formal economy. The not-so-good factor is that an increase in formalization allows the emergence of bigger businesses which may form a cartel and start charging a higher price. Additionally, these bigger players can create entry barriers for other efficient smaller and marginal players by hoarding/having access to scarce resources through political funding. The survival of small and medium enterprises (SMEs) are important from the perspective of job creation. Moreover, SMEs produce goods which are typically consumed by low and middle-income households with a higher marginal propensity to consume.
A report by Marcellus, an asset management firm suggests India's top 20 firms earn 60% of corporate India's cash flow. The 20 big corporations in India generate 70% of the country's profits, up from 14%, around 30 years back. One can see the presence of such big firms in anyone's day-to-day life starting with baby foods, biscuits, medicines, education, healthcare, hotels, and travels.
There are indications about prices of goods and services rising, and this may be because of the existence of few dominant players in the market. For example, over the last three years, entry level telecom tariffs have increased by 340%; from Rs 35 to Rs 155. Price of air fares shot up after Go First airline was grounded.
The cost of healthcare and education, most of which has to be borne privately, are also on the rise. As per the latest household social consumption data (NSS 75th Round), only 4% of the rural population and 19% of the urban population reported that they had health expenditure coverage. According to the Economic Survey 2022-23, almost half of all medical expenses are still borne by the patient themselves.
A recent study points out how the price of drugs and profitability of domestic pharmaceutical firms have grown post-COVID times. According to this study, cumulative wealth of major pharma billionaires doubled after 2018, and 15 of India's top 100 billionaires are from pharmaceutical industries. This study covered data from six pharma and diagnostic companies, and demonstrated a spike in overall profit and revenues between 2011 and 2021.
Similar is the story with providing education. As per a survey conducted by ET Online research, educating a child between the age of three to 17 years costs around Rs 30 lakh; a 4-year B.Tech. or a 3-year B.Sc. costs around Rs 4-20 lakh; and a five-and-half-year MBBS degree can cost up to Rs 1 crore.
The good news is India has already passed the Competition Law Amendment Bill. It is time to see that the price of these basic goods and services remain under control. (IPA Service)
(The author is Professor, School of Management, Mahindra University. He tweets @banik_nilanjan).
